Snap-on Incorporated

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Snap-on Incorporated is a global manufacturer and distributor of high-end tools, equipment, diagnostics, and related solutions primarily for professional users, with a strong focus on the automotive industry.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Snap-on Incorporated (SNA) operates primarily through its Commercial & Industrial Group (C&I), the Snap-on Tools Group, the Repair Systems & Information Group, and the Financial Services segment. Each segment contributes to the company’s diverse revenue streams, providing a range of tools, equipment, diagnostics, software, and financing options. The company’s core market is the automotive industry, but also serves professionals in the heavy-duty, aviation, agriculture, and other related sectors.

Revenue Distribution:

Commercial & Industrial Group (C&I): Serves industrial customers, including manufacturing, aerospace, power generation, natural resources, government, and aviation. This segment offers a variety of tools, equipment, and solutions.
Snap-on Tools Group: This segment sells through independent franchisees who directly distribute products, primarily to vehicle repair shops and service technicians. This is the most recognizable part of SNA’s business and is often viewed as a mobile tool store.
Repair Systems & Information Group (RS&I): This segment provides advanced diagnostic equipment, software, and repair information systems primarily to vehicle repair shops and other professional service facilities.
Financial Services: This segment provides financing options to customers to facilitate the purchase of Snap-on’s products. It contributes less to revenues but acts as a backbone to its other operations.

Industry Trends: The global automotive repair industry is experiencing ongoing changes, driven by factors such as:

Advanced Vehicle Technology: Increasing complexity of vehicles, particularly with electric and hybrid components, requires more sophisticated tools and diagnostic equipment. This benefits SNA’s RS&I division.
Shift to Servicing Complex Systems: Modern vehicles increasingly rely on complex electronic systems. The repair process requires tools and diagnostics to troubleshoot these systems, which favors advanced equipment providers.
Increased Data Analytics and IT Systems: The use of data and analytics in fleet management and vehicle maintenance is gaining traction. Companies need to adapt to this trend to improve their workflow and efficiency.
Labor Shortages: There are increasing labor shortages in the automotive industry, so professionals are expected to become more effective and efficient. This favors quality tools that require fewer inputs for the same job.
DIY and Online Sales: While DIY-based products have an increasing market share, they cannot replicate the needs or product quality of professional tools and diagnostics.

Competitive Landscape: SNA operates in a relatively competitive landscape. Key competitors include:

Other Tool Manufacturers: Brands such as Stanley Black & Decker, Milwaukee Tool, and Mac Tools offer tools that serve the professional and DIY markets.
Diagnostic Equipment Providers: There are a host of companies offering competing diagnostic solutions, and they are all trying to capture a higher share of a growing market.
Online Retailers: Websites that sell to both professional and individual consumers.
Low-Cost Imports: There are numerous low-cost imports that put pressure on prices.
Large Direct Suppliers: Companies such as Snap-on, with a large network of distribution, usually have an advantage over direct suppliers that must establish this infrastructure from scratch.
Direct competitors: Snap-on is unique, but it does have some direct competitors who rely on distributors as well.

What Makes SNA Different:

Direct Distribution Model: SNA’s franchise model enables close relationships with professional users, enhancing customer loyalty and ensuring high customer service levels. This approach has proven effective for maintaining customer and price power.
High Quality: SNA tools are known for their durability, reliability, and design-high quality, high priced items. The premium price is only a problem if it’s not met with high quality and robustness.
Brand Equity: Decades of experience and high quality product design have created trust with the professionals. This allows SNA to maintain a higher value per unit compared to competitors.
Advanced Technology and Diagnostic Software: SNA’s RS&I is more focused on the technology of modern-day vehicles.
Financial Solutions: Having a financial arm makes it easier for customers to buy more expensive tool setups, as they can pay them over a longer period of time.

Financial Analysis: Based on the latest quarterly reports available in October 2023, here’s an overview of Snap-on’s financials:

Revenue: While there has been a decrease in revenues during the latest quarter, from $1,105.8 to $1,066.8 (a decrease of 3.53%), the trend in revenues is still upward overall, from $1,093 million in Q3 2021 to $1,067 million in Q3 2022, and $1067 million in Q3 2023.
Operating Earnings: The operating earnings for Q3 2023 is $220.9 million. While there have been fluctuations between quarters, the last two quarters have been around $220 million, which is a significant increase from Q3 2021 with $189.7 million.
Net Earnings: For the latest quarter, net earnings are $164.0 million, or $3.15 per diluted share, an increase compared to previous years, but less compared to last quarter at $220 million.
Margins: Gross margins have averaged above 50% for the last few quarters. Net profit margin is still excellent at more than 15%, with some fluctuation between quarters. This proves the company has strong price power.
Financial Services: Total financial services revenue is $140.6 million, and the profit of the finance part of the business is at $47.7 million. These parts of the company are not very correlated to the tooling business, and provide a stable stream of cash flow.

Moat Rating: Based on the framework used in “The Little Book That Builds Wealth”, SNA would have a moat of “Narrow” to “Solid,” rated a 3/5, with the following justification.

Brand and Intangible Assets: SNA has established a strong brand name associated with high-quality, reliable tools. This allows for pricing power and customer retention, though competitors can also offer high quality tools.
Customer Switching Costs: Professionals, especially auto technicians, often heavily depend on SNA tools. If they were to switch to another brand, their processes would need to be changed to accommodate new tools or information systems. This creates a stickiness for its clients that is difficult to remove.
Cost Advantage: The vast size of operations, global infrastructure, and well-established distribution networks give SNA cost-based advantages.
Network Economics: While less obvious, the franchisee system enables a network effect that has been a staple of the business, as they provide information and feedback for future product development.

Risks to the Moat: There are some risks that could hurt SNA’s moat and business stability:

Erosion of Brand: While currently strong, the brand could suffer from poor quality tools and services, over time.
Technological Shifts: Rapid changes in technology could disrupt the competitive landscape by offering cheaper and better alternatives. This is particularly apparent in the diagnostics segment, which has to constantly innovate to keep up.
Economic Slowdown: A decrease in economic activity, particularly in discretionary spending, will hurt the purchase of SNA’s high-priced products.
Increased Competition: Growth in competition from global manufacturers or new entrants can lead to price wars and reduced margins.
Uncertainty around acquisitions: A lot of SNA’s revenue growth, especially lately, have been a result of acquisitions, which carry uncertainty of their own.

Business Resilience: Despite these risks, SNA has several sources of resilience:

High Brand Loyalty: Customer loyalty in the professional market is high, and switching can be hard.
Established Distribution Network: The franchisee network creates a difficult-to-replicate distribution system that acts as a shield against competitors.
Diverse Business Segments: Having various revenue streams allows the company to adapt to different economic landscapes, as well as being more stable.
Strong History of R&D: The company has a strong R&D arm that allows them to create new products and integrate them into the ecosystem with ease.
Financial strength and profitability: Through a vast customer base and diverse revenue streams, the company has a strong financial standing.

Financials in Detail:

Revenue Trends: While there has been a recent dip in overall revenues, the company is still showing positive growth compared to previous years. The financial crisis of 2007, and now Covid, have not had a noticeable effect on long-term growth of revenues, which has consistently risen in the past years.
Profit Margins: While there is some variability, profit margins are very high, and are constantly above 15%. This goes to show the pricing power of SNA, and the benefits of a large operation.
Operating Cash Flow: While free cash flows are not available for 2023, they have been positive and generally increasing in previous years.
Capital Structure: SNA seems to be a very stable company, with a conservative capital structure. The company has a mix of short-term and long-term debt, as well as a substantial portion of equity. The total liabilities and equity are roughly of similar magnitude.
Strong Balance Sheet: Overall, the balance sheet seems solid, with a high amount of cash and low debt. Short and long term assets are substantially higher than short and long term liabilities. This means the company can face potential adverse events.

Understandability Rating: 2 / 5 SNA’s business can be considered a bit more difficult to understand. It manufactures highly specialized equipment and sells it through a vast distribution network, with a financial arm to give the company an edge. Because of how far the business goes beyond manufacturing and retail, as well as financial and technological aspects, some additional thought is needed to get a grasp on its overall business model.

Balance Sheet Health: 4 / 5 The company has good financial health with low levels of debt compared to its equity, and a high amount of cash on hand, which makes the company resilient in the face of most adversities. However, the level of debt and how they manage their liabilities also needs to be taken into consideration for a holistic view.

Recent Concerns/Controversies:

Economic Slowdown: Management has pointed out a few times that they are aware of the economic downturn and are taking steps to try and navigate this uncertain period. They are increasing operational efficiencies as well as investing in their product development and infrastructure.
Pricing power is being tested: While their business shows strong underlying profits and revenues, they are carefully adjusting pricing and are looking at potential strategies that will help maintain customer loyalty and market share.
Uncertainty Around Acquisitions: Their recent string of acquisitions introduces a level of uncertainty. However, management has tried to ensure that value and returns are being focused on over time, so this effect should be minimal.